Page 18 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 1: Evolution and Meaning of Insurance

Insurance as a part of the financial system provides valuable services to those affected by various Notes
risks or contingencies.
It takes care of the financial consequences of certain specific contingencies but in insurance
terminology, such contingencies are called risks and they cause losses when they occur.
The effect of these losses on financial system is not only negative but may be disastrous and
catastrophic also. It results in substantial burden on the financial well-being of those affected.
The insurance sector supports the financial system in several ways. A few have been enumerated
below:

1. It accepts the risk from people and corporate bodies who are exposed to them.
2. It collects small amounts of premium, which are pooled together to be called an insurance
fund. This fund is used for investment purpose.

3. It organizes compulsory insurance in certain areas as per the provisions of the law.
4. It sells voluntary insurance covers through its sales force.
5. It settles claims arising out of insured losses. Neither the insurance company nor the
insured are allowed to make profits out of insurance. If insurance company gets a surplus.

Self Assessment

Fill in the blanks:
14. ……………………………. growth of a country depends on the existence of a well-functioning
financial infrastructure.

15. Insurance as a part of the ……………………………… system provides valuable services to
those affected by various risks or contingencies.

Case Study Should an Insurance Claim be paid to

Insured or Financier?

nder Singh Chauhan had purchased a bus by taking a loan from Swami Financiers. The
bus was being used as a private service vehicle, and not as a public transport one. It
Iwas insured under a comprehensive insurance policy issued by United India Insurance.
The bus met with an accident, for which insurance was claimed. The insurance company
appointed its surveyor, who assessed the loss at ` 1,26,500. However, the company deducted
` 33,125 from the assessed amount, on the ground that the driver did not have an
endorsement on his licence to drive a transport vehicle. Even this amount was not paid to
Chauhan, but was directly paid to the financier.
Aggrieved, Chauhan filed a consumer complaint that ultimately reached the National
Commission. It was held that once a person had a licence to drive a heavy goods carriage
vehicle, it would mean that he/she was entitled to drive a transport vehicle, including a
public service vehicle. Accordingly, the insurance company was directed to pay the balance
amount, along with 12 per cent interest and costs of ` 5,000.
The commission also ruled that the practice adopted by insurance companies of directly
paying to the financier, without informing the insured or without his consent, cannot be
Contd...

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